U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-26453
---------
COMMERCE ONE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0322810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4440 Rosewood Drive
Pleasanton, CA 94588
(Address of principal executive offices)
(925) 520-6000
(Registrant's telephone number, including area code)
Indicate by check (X) whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of May 8, 2000, there were 155,646,498 shares of the registrant's Common
Stock outstanding.
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PAGE 1
COMMERCE ONE, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)............................................ 3
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999....................................................... 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999.................................. 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999........................................ 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................................... 7
Risk Factors................................................................ 12
Item 3. Quantitative and Qualitative Disclosures of Market Risk..................... 22
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................... 23
Item 6. Exhibits and Reports on Form 8-K............................................ 24
Signatures.................................................................. 24
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Commerce One, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
March 31, December 31,
2000 1999
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 23,991 $ 51,792
Short term investments 73,048 72,814
Accounts receivable, net 26,520 15,845
Prepaid expenses and other current assets 7,003 4,656
------------ ------------
Total current assets 130,562 145,107
Property and equipment, net 20,261 11,892
Other investments 2,750 --
Goodwill and other intangible assets, net 347,613 227,611
------------ ------------
Total assets $ 501,186 $ 384,610
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,205 $ 6,885
Accrued compensation and related expenses 7,950 3,972
Current portion of capital lease obligations 86 274
Current portion of notes payable 446 411
Deferred revenue 46,050 40,414
Other current liabilities 19,390 15,671
------------ ------------
Total current liabilities 82,127 67,627
Notes payable 129 262
Stockholders' equity:
Common stock, $0.0001, 250,000,000 shares
authorized; 155,053,422 and 149,936,476
issued and outstanding at March 31, 2000
and December 31, 1999, respectively 584,918 423,839
Deferred stock compensation (19,231) (4,110)
Accumulated deficit (146,201) (102,556)
Accumulated other comprehensive loss (556) (452)
------------ ------------
Total stockholders' equity 418,930 316,721
------------ ------------
Total liabilities and stockholders' equity $ 501,186 $ 384,610
============ ============
See notes to condensed consolidated financial statements.
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Commerce One, Inc.
Condensed Consolidated Statement of Operations
(In thousands, except per share data)
Three months ended
March 31,
--------
2000 1999
---- ----
(unaudited) (unaudited)
Revenues:
License fees $ 27,121 $ 1,456
Services 7,888 648
------------ ------------
Total revenues 35,009 2,104
Costs and expenses:
Cost of license fees 1,099 --
Cost of services 10,816 1,668
Sales and marketing 19,204 4,078
Product development 14,154 3,362
General and administrative 3,686 827
Purchased in-process research and development 5,142 3,037
Amortization of deferred stock compensation 4,199 584
Amortization of goodwill and other intangible
assets 21,895 875
------------ ------------
Total costs and operating expenses 80,195 14,431
------------ ------------
Loss from operations (45,186) (12,327)
Interest income, net 1,541 16
------------ ------------
Loss before income taxes (43,645) (12,311)
Provision for income taxes -- --
------------ ------------
Net loss $ (43,645) $ (12,311)
============ ============
Basic and diluted net loss per share $ (0.29) $ (0.14)
============ ============
Shares used in calculation of net loss per
share 151,420 85,050
============ ============
See notes to condensed consolidated financial statements.
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Commerce One, Inc.
Condensed Consolidated Statement of Cash Flows
(In thousands)
Three months ended
March 31,
--------
2000 1999
------------ ------------
(unaudited) (unaudited)
Operating activities:
Net loss $ (43,645) $ (12,311)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,536 403
Purchased in-process research and development 5,142 3,037
Amortization of deferred stock compensation 4,199 584
Amortization of goodwill and other intangible
assets 21,895 875
Changes in operating assets and liabilities:
Accounts receivable (10,675) 719
Prepaid expenses and other current assets (2,254) (46)
Accounts payable 1,192 415
Accrued compensation and related expenses 3,978 (184)
Other current liabilities 3,532 326
Deferred revenue 5,636 (144)
------------ ------------
Net cash used in operating activities (9,464) (6,326)
Investing activities:
Purchase of property and equipment (9,718) (743)
Purchase of short term investments (234) --
Proceeds from the maturity of short term
investments 20 --
Business combinations, net of cash acquired (28,391) (42)
Other investments (2,750) --
------------ ------------
Net cash used in investing activities (41,073) (785)
Financing activities:
Proceeds from issuance of common stock, net 23,150 87
Payments on notes payable (98) (188)
Payments on capital lease obligations (192) (79)
------------ ------------
Net cash provided by (used in) financing activities 22,860 (180)
Effect of foreign currency translation on cash and
cash equivalents (124) (8)
------------ ------------
Decrease in cash and cash equivalents (27,801) (7,299)
Cash and cash equivalents at the beginning of period 51,792 15,138
------------ ------------
Cash and cash equivalents at end of period $ 23,991 $ 7,839
============ ============
Supplemental disclosures:
Interest paid $ 55 $ 138
============ ============
Noncash investing and financing activities:
Deferred compensation related to stock option
grants $ 19,320 $ 1,982
============ ============
Conversion of borrowings under bank line of credit
to notes payable $ -- $ 750
============ ============
Issuance of preferred stock, common stock and
assumption of stock options in connection with
business combinations $ 137,929 $ 21,151
============ ============
See notes to condensed consolidated financial statements.
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COMMERCE ONE, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principals
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim periods
presented are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending December 31, 2000.
The Company has one business segment which provides
business-to-business electronic commerce solutions that use the Internet to
link buyers and sellers of business goods and services into real-time trading
communities.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1999.
2. BASIC AND DILUTED NET LOSS SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirements of FASB Statement No. 128, "Earnings per Share"
("FAS 128"). Basic earnings per share has been computed using the
weighted-average number of shares of common stock outstanding during the period,
less shares that may be repurchased, and excludes any dilutive effects of
options, warrants, and convertible securities. Potentially dilutive issuances
have also been excluded from the computation of diluted net loss per share as
their inclusion would be antidilutive.
Pro forma net loss per share has been computed as described above and
also gives effect, under Securities and Exchange Commission guidance, to the
conversion of preferred shares not included above that automatically converted
to common shares upon completion of the Company's initial public offering, using
the if-converted method.
The calculation of historical and pro forma basic and diluted net loss
per share is as follows (in thousands, except per share amounts):
Three months ended
March 31,
--------
2000 1999
------------ ------------
Historical:
Net loss $ (43,645) $ (12,311)
Preferred stock accretion -- (178)
------------ ------------
Loss applicable to common stockholders $ (43,645) $ (12,489)
Weighted average shares of common stock outstanding 153,505 29,700
Less: Weighted average shares subject to repurchase (2,085) (1,362)
------------ ------------
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per share 151,420 28,338
------------ ------------
Basic and diluted net loss per share $ (0.29) $ (0.44)
============ ============
Pro forma:
Net loss $ (43,645) $ (12,311)
Weighted average shares used in computing basic and
diluted net loss per share (from above) 151,420 28,338
Adjustment to reflect the effect of the assumed
conversion of preferred stock from the date of
issuance -- 56,712
------------ ------------
Weighted average shares used in computing pro forma
basic and diluted net loss per share 151,420 85,050
------------ ------------
Pro forma basic and diluted net loss per share $ (0.29) $ (0.14)
============ ============
3. STOCKHOLDERS' EQUITY
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Stock Split
On March 13, 2000, the Board of Directors approved a two-for-one
stock split of common stock. The stock split was effected as a stock dividend
for stockholders of record as of March 24, 2000. All common share and per
share information included in the accompanying financial statements has been
restated to give effect to the stock split which was effective April 19, 2000.
4. COMPREHENSIVE INCOME (LOSS)
Financial Accounting Standards Board (SFAS) No. 130 "Reporting
Comprehensive Income", establishes standards of reporting and display of
comprehensive income and its components of net income and "Other Comprehensive
Income". "Other Comprehensive Income" refers to revenues, expenses and gains and
losses that are not included in net income but rather are recorded directly in
stockholders' equity. The components of comprehensive loss for the three months
ended March 31, 2000 and 1999 were as follows (in thousands):
Three months ended
March 31,
-------------------------
2000 1999
-------- ---------
Net loss $(43,645) $(12,311)
Unrealized gain on investments 20 -
Foreign currency translation adjustments (124) (8)
-------- --------
Comprehensive loss $(43,749) $(12,319)
5. ACQUISITIONS
On January 7, 2000, the Company acquired Mergent Systems, Inc.
(Mergent), a company specializing in enabling infomediaries and Global 3000
companies to create, operate, and manage product information systems and
aggregated multivendor catalogs for e-commerce. The purchase consideration
was approximately $148.4 million consisting of 1,742,190 shares of common stock
with a fair value of $122.6 million, assumed options to acquire 219,010
shares of common stock with a fair value of $15.3 million and approximately
$10.0 million in cash paid to the Mergent stockholders.
We estimated that approximately $5.1 million of the $148.4 million
purchase consideration represented purchased in-process research and
development that has not yet reached technological feasibility and has no
alternative future use. Accordingly, this amount has been charged to
operations in the three months ended March 31, 2000. A total of approximately
$8.8 million of the purchase consideration was allocated to other intangible
assets, including purchased technology ($7.9 million), assembled workforce
($373,000) and tradenames/patent ($555,000) and a total of approximately
$133.1 million of the purchase consideration was allocated to goodwill with
these amounts being amortized over periods of one to five years.
6. INVESTMENTS
The Company has made several strategic investments in privately held
companies. The Company holds less than a 20% interest and does not have a
significant influence over their investee companies. These investments are
recorded at cost.
7. GENERAL MOTORS AGREEMENT
In January 2000, we entered into agreements with General Motors to
create and operate the GM TradeXchange, an Internet-based trading exchange
owned by GM that enables buying and selling over the Internet by GM, its
dealers and its suppliers. The agreements governing the GM TradeXchange
currently provide that Commerce One and GM will share equally in the net
revenues generated by the GM TradeXchange, after the repayment of both
parties expenses, for an anticipated ten-year term. The GM TradeXchange
agreements also provided for the restructuring of Commerce One into a holding
company and the issuance of 28,800,000 shares of common stock to GM. Of these
28,800,000 shares, 14,400,000 shares will be held in escrow until the GM
TradeXchange has repaid the accumulated investments by both Commerce One and
GM in developing the GM TradeXchange. The shares issued to GM will generally
not be freely transferable for three years and would be subject to standstill
restrictions that will restrict GM's ability to acquire more than 19.9% of
the Company's outstanding stock during the first three years of the
relationship or more than 25.0% thereafter. GM is also entitled to certain
registration rights with respect to the shares after the initial three year
period. The closing of the GM TradeXchange agreements remains subject to
certain customary closing conditions, including requisite regulatory
clearance, and has been delayed pending the negotiations described below.
Subsequent to the execution of the GM TradeXchange agreements,
Commerce One and GM have entered into negotiations with Ford Motor Company,
DaimlerChrysler and Oracle Corporation concerning the possible creation of a
broader business-to-business e-commerce exchange for the automotive industry.
Such an exchange would integrate or combine the GM TradeXchange with an
Internet-based trading exchange being developed by Ford and Oracle
Corporation. The parties have not, however, reached agreement on the specific
terms and conditions governing the creation of the exchange, the
responsibilities of the parties with respect to the exchange, or the extent
to which the parties, including Commerce One, will receive equity in the
exchange and share in the revenues of the exchange. In addition, such an
agreement would also require regulatory clearance.
We cannot assure you that the parties will reach an agreement for a
broader trading exchange on mutually acceptable terms and conditions or that
such an agreement would receive regulatory clearance. Further, if such an
agreement is not reached, we cannot assure you that the GM TradeXchange
agreements will receive regulatory clearance and close in a timely fashion,
or at all. For more information concerning certain risks associated with the
GM TradeXchange or a broader exchange for the automotive industry, see the
Risk Factors section of this Form 10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Background
Commerce One is a leading provider of business-to-business
electronic commerce solutions that link buyers and suppliers of goods and
services into trading communities over the Internet. We were founded under
the name DistriVision Development Corporation in 1994. In March 1997, we
changed our name to Commerce One, Inc. and embarked on an aggressive product
development effort, which culminated in the release of the BUYSITE and
MARKETSITE products in April 1998. In March 1999, we were incorporated under
the laws of the state of Delaware. We released subsequent versions of the
BUYSITE and MARKETSITE products in November 1998, April 1999 and December 1999.
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Source of Revenues
We generate revenues from multiple sources. License fees are
generated from licensing the BUYSITE and MARKETSITE products to end-user
organizations, primarily Fortune 1000 enterprises and major international
enterprises. Professional service fees are received from BUYSITE and
MARKETSITE licensees and their suppliers for enterprise resource planning
integration, content aggregation, project management and other related
services. Software maintenance revenues are generated from product licensees
based on the extent of the service provided. MARKETSITE subscription fees are
received from BUYSITE licensees, as well as other customers, for the right to
access services in MARKETSITE. Transaction fees are received from suppliers
for purchase orders the supplier receives through MARKETSITE. To date,
transaction and MARKETSITE subscription fees have been immaterial. However,
our revenue growth will depend upon realizing significant transaction and
MARKETSITE subscription fees in the future.
Revenue Recognition
We recognize revenues from license agreements upon delivery and
acceptance of the software if there is persuasive evidence of an arrangement,
collection is probable, the fee is fixed or determinable, and there is
sufficient vendor-specific objective evidence to support allocating the total
fee to all elements of multiple-element arrangements. If an acceptance period is
required, license revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period.
We recognize revenues from professional services as the services are
provided. If a transaction includes both license and service elements, the
license fee is recognized on delivery and acceptance of the software, provided
services do not include significant customization or modification of the base
product, and the payment terms for licenses are not dependent on additional
acceptance criteria. In cases where license fee payments are contingent on the
acceptance of services, recognition of revenues is deferred for both the license
and the service elements until the acceptance criteria are met. Software
maintenance revenues and MarketSite subscription fees are recognized ratably
over the term of the support contract, typically one year. Transaction fees
are recognized as earned.
RECENT EVENTS
Strategic Relationship with General Motors
In January 2000, we entered into agreements with General Motors to
create and operate the GM TradeXchange, an Internet-based trading exchange owned
by GM that enables buying and selling over the Internet by GM, its dealers and
its suppliers. The agreements governing the GM TradeXchange currently provide
that Commerce One and GM will share equally in the net revenues generated by the
GM TradeXchange, after the repayment of both parties expenses, for an
anticipated ten-year term. The GM TradeXchange agreements also provided for the
restructuring of Commerce One into a holding company and the issuance of
28,800,000 shares of common stock to GM. Of these 28,800,000 shares, 14,400,000
shares will be held in escrow until the GM TradeXchange has repaid the
accumulated investements by both Commerce One and GM in developing the GM
TradeXchange. The shares issued to GM will generally not be freely transferable
for three years and would be subject to standstill restrictions that will
restrict GM's ability to acquire more than 19.9% of the Company's outstanding
stock during the first three years of the relationship or more than 25.0%
thereafter. GM is also entitled to certain registration rights with respect to
the shares after the initial three year period. The closing of the GM
TradeXchange agreements remains subject to certain customary closing conditions,
including requisite regulatory clearance, and has been delayed pending the
negotiations described below.
Subsequent to the execution of the GM TradeXchange agreements, Commerce
One and GM have entered into negotiations with Ford Motor Company,
DaimlerChrysler and Oracle Corporation concerning the possible creation of a
broader business-to-business e-commerce exchange for the automotive industry.
Such an exchange would integrate or combine the GM TradeXchange with an
Internet-based trading exchange being developed by Ford and Oracle Corporation.
The parties have not, however,
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PAGE 8
reached agreement on the specific terms and conditions governing the creation
of the exchange, the responsibilities of the parties with respect to the
exchange, or the extent to which the parties, including Commerce One, will
receive equity in the exchange and share in the revenues of the exchange. In
addition, such an agreement would also require antitrust clearance from the
Federal Trade Commission or Department of Justice.
We cannot assure you that the parties will reach an agreement for a
broader trading exchange on mutually acceptable terms and conditions or that
such an agreement would receive regulatory clearance. Further, if such an
agreement is not reached, we cannot assure you that the GM TradeXchange
agreements will receive regulatory clearance and close in a timely fashion,
or at all. For more information concerning certain risks associated with the
GM TradeXchange or a broader exchange for the automotive industry and
antitrust concerns, see the Risk Factors section of this Form 10-Q.
Acquisition of Mergent Systems, Inc.
On January 7, 2000, the Company acquired Mergent Systems, Inc. a
company specializing in enabling infomediaries and Global 3000 companies to
create, operate, and manage product information systems and aggregated
multivendor catalogs for e-commerce. The purchase consideration was
approximately $148.4 million consisting of 1,742,190 shares of common stock
with a fair value of $122.6 million, assumed options to acquire 219,010
shares of common stock with a fair value of $15.3 million and approximately
$10.0 million in cash paid to the Mergent stockholders.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenue
Total revenues for the three months ended March 31, 2000 increased
to approximately $35.0 million compared to $2.1 million in the three months
ended March 31, 1999. In the three months ended March 31, 2000 two customers
accounted for 16% and 12% of our revenue and in the three months ended
March 31, 1999 four customers accounted for 26%, 19%, 18% and 18% of our
revenue.
License revenues for the three months ended March 31, 2000 increased
to approximately $27.1 million compared to $1.5 million in the three months
ended March 31, 1999. The increase in revenues from license fees resulted
from an increase in new customers who purchased and accepted the BUYSITE and
MARKETSITE products.
Service revenues include revenue from professional services,
maintenance fees, and to a lesser degree, MarketSite subscription fees,
training fees and transaction fees. Services revenues increased to
approximately $7.9 million for the three months ended March 31, 2000 compared
to $0.6 million for the three months ended March 31, 1999. The increase in
service revenues resulted primarily from an increase in consulting services
provided at an increased number of customer sites.
Cost of Revenues
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Cost of revenues, consisting of cost of services and costs of
license fees, were approximately $11.9 million in the three months ended
March 31, 2000 compared to $1.7 million in the three months ended March 31,
1999.
Cost of services, which primarily consists of consulting, customer
support and training costs, were $10.8 million compared to $1.7 million in
the three months ended March 31, 2000 and 1999, respectively. The increase in
cost of services resulted primarily from an increase in personnel related
expenses due to the hiring and training of consulting, support and training
personnel in the United States and Europe.
Cost of license fees for the three months ended March 31, 2000 of
$1.1 million consisted of royalties due to third parties related to the use
of third party software. Cost of license fees also includes software media
and duplication and software documentation costs, although these costs have
not been material to date.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of seminars, promotional materials,
trade shows and other sales and marketing programs. Sales and marketing
expenses were approximately $19.2 million and $4.1 million for the three
months ended March 31, 2000 and 1999, respectively. The increase in 2000 was
primarily attributable to an overall increase in the number of sales and
marketing personnel as well as an increase in marketing related activity. The
number of employees engaged in sales and marketing increased to 233 at March
31, 2000 from 62 at March 31, 1999. The increase in 2000 was also
attributable to increased commission expense, travel related expense
resulting from increased sales activity and allocated overhead expenses. We
expect that the dollar amount of sales and marketing expenses will continue
to increase due to the planned growth of our sales force, including the
establishment of sales offices in additional domestic and international
locations, and due to expected additional increases in marketing programs and
other promotional activities.
Product Development Expenses
Product development expenses consist primarily of personnel and
related costs associated with our product development efforts. Product
development expenses were approximately $14.2 million and $3.4 million, for
the three months ended March 31, 2000 and 1999, respectively. The increase in
product development expenses during 2000 was primarily attributable to
personnel and consulting related expenses to support development of the
BUYSITE and MARKETSITE products and other strategic initiatives. The
overall number of employees engaged in product development was 310 at March
31, 2000 and 89 at March 31, 1999. We believe that investments in product
development are essential to our future success and expect that the dollar
amount of product development expenses will increase in future periods.
General and Administrative Expenses
General and administrative expenses consist primarily of employee
salaries and related expenses for executive, administrative and finance
personnel. General and administrative expenses were approximately $3.7
million and $0.8 million for the three months ended March 31, 2000 and 1999,
respectively. The increase was primarily attributable to an increase in
personnel related expenses and additional legal cost associated with our
portal joint ventures. The number of employees engaged in general and
administrative functions increased to 118 at March 31, 2000 from 15 at March
31, 1999. We expect general and administrative expenses to increase in future
periods.
Purchased In-Process Development
On January 7, 2000, the Company acquired Mergent Systems, Inc., a
company specializing in enabling infomediaries and Global 3000 companies to
create, operate, and manage product information systems and aggregated
multivendor catalogs for e-commerce. The purchase consideration was
approximately $148.4 million consisting of 1,742,190 shares of common stock
with a fair value of $122.6 million, assumed options to acquire 219,010
shares of common stock with a fair value of $15.3 million and approximately
$10.0 million in cash paid to the Mergent stockholders.
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We estimated that approximately $5.1 million of the $148.4 million
purchase consideration represented purchased in-process research and
development that has not yet reached technological feasibility and has no
alternative future use. Accordingly, we charged this amount to operations in
the three months ended March 31, 2000. A total of approximately $8.8 million
of the purchase consideration was allocated to other intangible assets,
including purchased technology ($7.9 million), assembled workforce ($373,000)
and tradenames/patents ($555,000) and a total of approximately $133.1 million
of the purchase consideration was allocated to goodwill with these amounts
being amortized over periods of one to five years.
Purchased in-process research and development consists of two
projects: (1) the development of an enterprise application that enables fast,
easy electronic catalog creation, product information management and
aggregation for both infomediaries and large corporations who automate
their procurement processes and (2) the development of a new feature which
will enable users to get unstructured HTML files in a form that can be
utilized by the enterprise application. These applications will be integrated
into our products. The efforts required to develop the acquired in-process
technology include the completion of all planning, designing and testing
activities that are necessary to establish that the product or service can be
produced to meet its design requirements, including functions, features and
technical performance requirements.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product revenues. The discounted cash flow analysis was based on management's
forecast of future revenues, cost of revenues, and operating expenses related
to the products and technologies purchased from Mergent. The calculation of
value was then adjusted to reflect only the value creation efforts of Mergent
prior to the close of the acquisition. At the time of the acquisition, the
product was approximately 75% complete with approximately $300,000 in
estimated costs remaining, the majority of which are expected to be incurred
in 2000. The technology is expected to be available for use in our products
in the latter half of 2000 and have a technology life of approximately 3.5
years. The resultant value of in-process technology was further reduced by
the estimated value of core technology, which was included in capitalized
developed technology.
The discount rates selected for estimating future discounted cash
flows for the core and in-process technology were 18% and 24%, respectively.
In the selection of the appropriate discount rates, consideration was given
to our estimated weighted average return on working capital and our estimated
weighted average return on assets. The discount rate utilized for the
in-process technology was determined to be higher than our estimated weighted
average return on working capital due to the fact that the technology had not
yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than our weighted average return on working
capital, we have reflected the risk premium associated with achieving and
sustaining growth rates and improved profitability as well as the increased
rates of return associated with intangible assets.
Amortization of Deferred Stock Compensation
Amortization of deferred stock compensation totaled approximately
$4.2 million and $0.6 million in the three months ended March 31, 2000 and
1999, respectively. The increase in the amortization of deferred stock
compensation in the current period is related to a change in the vesting
schedule for certain options assumed in the acquisition of CommerceBid and
Mergent as well as certain options granted to employees of CommerceBid and
Mergent at exercise prices less than the deemed fair market value on the
grant date. The deferred stock compensation is being amortized over the
vesting period of the related options using a graded vesting method. The
vesting period of the options range from three to four years.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets was $21.9
million for the three months ended March 31, 2000 which was attributable to
the amortization of goodwill and other purchased intangible assets resulting
from the acquisitions of Veo Systems, Inc. and CommerceBid during 1999 and
Mergent Systems during the current period.
We expect to incur quarterly charges thru January 2004 to
amortization of goodwill and other intangible assets of approximately $22.0
million related to these acquisitions. In
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the event of future acquisitions, we anticipate the amortization of goodwill
and other intangible assets will increase.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our cash requirements primarily
through issuances of equity securities and lease and debt financing. On July
7, 1999, we closed an initial public offering and concurrent private
placement of our common stock which resulted in net proceeds of approximately
$92.5 million.
Net cash used in operating activities totaled approximately $9.5
million for the quarter ended March 31, 2000 as compared to net cash used in
operating activities of approximately $6.3 million in the quarter ended March
31, 1999. Cash used in operating activities for the quarters ended March 31,
2000 and 1999 resulted primarily from the net losses in the respective
quarters which was partially offset by the amortization of goodwill and other
intangible assets associated with the acquisitions of VEO Systems,
CommerceBid and Mergent Systems, purchased in-process research and
development associated with the acquisition of Mergent Systems and deferred
revenue.
Net cash used in investing activities totaled approximately $41.1
million for the three months ended March 31, 2000 as compared to
approximately $0.8 million for the three months ended December 31, 1999. The
uses in each period resulted from the acquisition of capital assets,
primarily computer and office equipment, as well as the acquisition of
Mergent Systems in the current period. We anticipate an increase in our
capital expenditures consistent with anticipated growth in operations,
infrastructure and personnel.
Net cash provided by financing activities totaled approximately
$22.9 million for the quarter ended March 31, 2000 as compared to
approximately $0.1 million used in financing activities in the quarter ended
March 31, 1999. The cash provided in the quarter ended March 31, 2000
resulted primarily from proceeds from the issuance of common stock upon the
exercise of employee stock options.
As of March 31, 2000, our principal sources of liquidity included
approximately $97.0 million of cash, cash equivalents and short term
investments.
We believe that our available cash resources together with the net
proceeds from our public offering and the concurrent private placement in
July 1999 will be sufficient to finance our presently anticipated operating
losses and working capital expenditure requirements for at least the next
twelve months. Our future liquidity and capital requirements will depend upon
numerous factors. The rate of expansion of our operations in response to
potential growth opportunities and competitive pressures will affect our
capital requirements as will funding of continued net losses and substantial
negative cash flows. Additionally, we may need additional capital to fund
acquisitions of complementary businesses, products and technologies. Our
forecast of the period of time through which its financial resources will be
adequate to support operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary materially as a result
of the factors described above. If we require additional capital resources,
we may seek to sell additional equity or debt securities or secure a bank
line of credit. The sale of additional equity or convertible debt securities
could result in additional dilution to our stockholders. We cannot assure you
that any financing arrangements will be available in amounts or on terms
acceptable to us, if at all.
NEW ACCOUNTING PRONOUCEMENTS
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements of all public registrants. Any
change in the Company's revenue recognition policy resulting from the
interpretation of SAB 101 would be reported as a change in accounting
principle in the quarter ending June 30, 2000. While the Company has not
fully assessed the impact of the adoption of SAB 101, it believes that
implementation of SAB 101 will not have a material adverse impact on its
existing revenue recognition policies or its reported results of operations
for fiscal 2000.
RISK FACTORS
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Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical facts may
be deemed to be forward-looking statements. For example, words such as "may",
"will", "should", "estimates", "predicts", "potential", "continue",
"strategy", "believes", "anticipates", "plans", "expects", "intends", and
similar expressions are intended to identify forward-looking statements.
These statements also include statements concerning our agreements with
General Motors and discussions with other automotive companies concerning the
establishment of an electronic exchange for the automotive industry, the
establishment of other electronic exchanges, the growth of our business and
related matters. Our actual results and the timing of certain events may
differ significantly from the results discussed in the forward-looking
statements. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, regulatory delays and issues, competitive
pressures, difficulties in growing our business to meet our commitments,
technical challenges and those discussed in this "Risk Factors" section and
the risks discussed in our other Securities Exchange Commission ("SEC")
filings, including our Registration Statement on Form S-1 declared effective
on July 1, 1999 by the SEC (File No. 333-76987) and in our Annual Report on
Form 10-K filed March 30, 2000 with the SEC.
WE HAVE A LIMITED OPERATING HISTORY, WE HAVE A HISTORY OF LOSSES AND WE EXPECT
FUTURE LOSSES.
We have never been profitable, we expect to incur net losses for the
foreseeable future and we may never be profitable. We incurred net losses of
$43.6 million and $12.3 million for the three months ended March 31, 2000 and
1999, respectively. As of March 31, 2000, we had an accumulated deficit of
$146.2 million.
In addition, we have a limited operating history that makes it
difficult to forecast our future operating results. We expect to
substantially increase our sales and marketing, product development and
general and administrative expenses. As a result, we will need to generate
significant additional revenues to achieve and maintain profitability in the
future. Although our revenues have grown in recent quarters, we cannot be
certain that such growth will continue or that we will achieve sufficient
revenues for profitability. If we do achieve profitability in any period, we
cannot be certain that we will sustain or increase such profitability on a
quarterly or annual basis.
THE QUARTERLY FINANCIAL RESULTS OF COMPANIES IN OUR INDUSTRY ARE PRONE TO
SIGNIFICANT FLUCTUATIONS AND THIS COULD CAUSE OUR STOCK PRICE TO FALL.
We believe that quarter-to-quarter comparisons of our revenues and
operating results are not necessarily meaningful, and that such comparisons
may not be accurate indicators of future performance. The operating results
of companies in the electronic commerce industry have in the past experienced
significant quarter-to-quarter fluctuations. If our revenues for a quarter
fall below our expectations and we are not able to quickly reduce our
spending in response, our operating results for that quarter would be harmed.
It is likely that in some future quarter our operating results may be below
the expectations of public market analysts and investors and, as a result,
the price of our common stock may fall. As with other companies in our
industry, our operating expenses, which include sales and marketing, product
development and general and administrative expenses, are based on our
expectations of future revenues and are relatively fixed in the short term.
OUR FUTURE SUCCESS DEPENDS UPON OUR COMMERCE SERVICE PROVIDER PARTNERS
DEVELOPING AND OPERATING SUCCESSFUL MARKETSITE MARKETPLACES; IF MARKETPLACES
DEVELOPED BY OUR PARTNERS ARE NOT SUCCESSFUL, WE WILL NOT GENERATE SUFFICIENT
REVENUES TO SUSTAIN OUR BUSINESS OR ALLOW US TO GROW.
We have established strategic relationships with various companies
each of whom has licensed our BUYSITE and MARKETSITE PORTAL SOLUTION products
in order to create MARKETSITE marketplaces. These MARKETSITE marketplaces are
in the United Kingdom, Japan and Southeast Asia as well as many other
geographical regions. We cannot assure you that these partners will be able
to implement our products and services effectively, that they will develop
and launch MARKETSITE marketplaces or that buyers or suppliers will
participate in their MARKETSITE marketplaces. Furthermore, these parties may
encounter delays in launching their MarketSite marketplaces, in fully
deploying these marketplaces and in achieving supplier participation in the
marketplace. If these or any other MARKETSITE marketplaces are not
successful, our business, operating results and financial condition will
suffer.
Many of the companies that have agreed to launch, or have indicated
that they will launch MarketSites have not yet done so. Additionally,
although our technology architecture supports the development of trading
communities that can operate with each other, we cannot assure you that their
marketplaces will in fact operate with each other. Furthermore, we cannot
assure you that these marketplaces will be able to successfully adapt to
address markets of different size, scope and geography.
THE DEVELOPMENT AND OPERATION OF THE GM TRADEXCHANGE OR A SIMILAR EXCHANGE
FOR THE AUTOMOTIVE INDUSTRY ENTAILS CERTAIN RISKS FOR US.
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In January 2000, we entered into agreements with General Motors to
create and operate the GM TradeXchange, an Internet-based trading exchange
owned by GM that enables buying and selling over the Internet by GM, its
dealers and its suppliers. The closing of the GM TradeXchange agreements
remain subject to certain customary closing conditions, including requisite
regulatory clearance, and has been delayed pending the negotiations described
below.
Subsequent to the execution of the GM TradeXchange agreements,
Commerce One and GM have entered into negotiations with Ford Motor Company,
DaimlerChrysler and Oracle Corporation concerning the possible creation of a
broader business-to-business e-commerce exchange for the automotive industry.
Such an exchange would integrate or combine the GM TradeXchange with an
Internet-based trading exchange being developed by Ford and Oracle
Corporation. The parties have not, however, reached agreement on the specific
terms and conditions governing the creation of the exchange, the
responsibilities of the parties with respect to the exchange, or the extent
to which the parties, including Commerce One, will receive equity in the
exchange and share in the revenues of the exchange. In addition, such an
agreement would also require antitrust clearance from The Federal Trade
Commission or Department of Justice.
The foregoing statements and the other statements in this Form 10-Q
concerning the potential development and launch of the GM TradeXchange or of
a broader trading exchange for the automotive industry are forward-looking
statements that are subject to risks and uncertainties. We cannot assure you
that the parties will reach an agreement for a broader trading exchange on
mutually acceptable terms and conditions or that such an agreement would
receive regulatory clearance. Further, if such an agreement is not reached,
we cannot assure you that the GM TradeXchange agreements will receive
regulatory clearance and close in a timely fashion, or at all.
In addition, the development and operation of the GM TradeXchange or
any broader trading exchange will entail significant risks for Commerce One.
These risks include the diversion of a significant portion of our management,
technical and sales personnel to develop and operate the exchange; technical
hurdles associated with developing an exchange on this scale and integrating
it with GM's existing computer systems and those of other parties; antitrust
issues arising from the creation of the exchanges; disagreements with GM and
other parties concerning the development and operation of the exchange; and
all of the other risks of creating such exchanges described elsewhere in this
Risk Factors section. If we are not able to manage these risks, our business,
results of operations and financial condition will suffer.
OUR STRATEGY OF ESTABLISHING MARKETSITE MARKETPLACES AS TRADING COMMUNITIES IS
UNPROVEN AND MAY NOT BE SUCCESSFUL.
As part of our business strategy, we intend, directly and through
relationships with our strategic partners, to establish and maintain
MARKETSITE marketplaces where buyers and suppliers can conduct
business-to-business electronic commerce. If this business strategy is
flawed, or if we are unable to execute it effectively, our business,
operating results and financial condition will be substantially harmed. To
date, we have not generated significant revenue from the MarketSite Global
Trading Portal or any significant transaction-based revenue from any of the
MarketSite marketplaces.
BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, WE
CANNOT ASSURE YOU THAT WE WILL BE ABLE TO EFFECTIVELY COMPETE.
The market for Internet-based, business-to-business electronic
commerce solutions is extremely competitive. We expect competition to
intensify as current competitors expand their product offerings and new
competitors enter the market. We cannot assure you that we will be able to
compete successfully against current or future competitors, or that
competitive pressures we face will not harm our business, operating results
or financial condition.
Because there are relatively low barriers to entry in the electronic
commerce market, competition from other established and emerging companies
may develop in the future. In addition, our customers and partners may become
competitors in the
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PAGE 14
future. Certain of our competitors may be able to negotiate alliances with
strategic partners on more favorable terms than we are able to negotiate.
Many of our competitors may also have well-established relationships with our
existing and prospective customers. Increased competition is likely to result
in price reductions, lower average sales prices, reduced margins, longer
sales cycles and decrease or loss of our market share, any of which could
harm our business, operating results or financial condition. Some of our
competitors are Ariba, Intelisys, i2, Oracle and iPlanet. In addition,
certain of our competitors have announced plans to jointly offer
business-to-business electronic commerce solutions to potential customers.
These joint efforts could intensify the competitive pressure in our market.
Many of our competitors have, and new potential competitors may
have, more experience developing Internet-based software and end-to-end
purchasing solutions, larger technical staffs, larger customer bases, more
established distribution channels, greater brand recognition and greater
financial, marketing and other resources than we have. In addition,
competitors may be able to develop products and services that are superior to
our products and services, that achieve greater customer acceptance or that
have significantly improved functionality as compared to our existing and
future products and services. We cannot assure you that the
business-to-business electronic commerce solutions offered by our competitors
now or in the future will not be perceived by buyers and suppliers as
superior to ours.
SIGNIFICANT ANTITRUST SCRUTINY OR ACTION WITH RESPECT TO BUSINESS-TO-BUSINESS
E-COMMERCE EXCHANGES MAY ADVERSELY AFFECT OUR REVENUES
We generate almost all of our revenues from licensing our MarketSite
and BuySite software to companies that establish, develop, operate or
participate in business-to-business e-commerce exchanges, as well as from
providing services in connection with these exchanges and, potentially, from
sharing in transaction fees generated in these exchanges. Recently, it has
been reported that the Federal Trade Commission, the Department of Justice
and other government agencies and bodies are considering whether these
exchanges violate federal, state or other antitrust laws. Federal, state or
foreign antitrust scrutiny and action with respect to these exchanges, or
the perception that such action may be taken, may delay the creation,
launch and scope of many of these exchanges. Our revenues may be adversely
affected as a result.
CURRENT AND FUTURE ACQUISITIONS MAY ADVERSELY AFFECT OUR BUSINESS
As part of our business strategy, we have made and expect to continue
to make acquisitions of businesses that offer complementary products,
services and technologies. In January 2000, we acquired Mergent Systems, Inc.,
a developer of distributed product information management systems for
business-to-business portals. Our acquisitions are and will be accompanied by
the risks commonly encountered in acquisitions of businesses. Such risks
include, among other things, the possibility that we pay much more than the
acquired business is worth, the difficulty of integrating the operations and
personnel of the acquired business into ours, the potential product liability
associated with the sale of the acquired business' products, the potential
disruption of our ongoing business, the distraction of management from our
business, the inability of management to maximize our financial and strategic
position, and the impairment of relationships with employees and customers.
We have limited experience acquiring businesses, and we cannot assure you
that we will identify appropriate targets, will acquire such businesses on
favorable terms, or will be able to integrate such organizations into our
business successfully. Further, the financial consequences of our
acquisitions and investments may include potentially dilutive issuances of
equity securities, one-time write-offs, amortization expenses related to
goodwill and other intangible assets and the incurrence of contingent
liabilities. These risks could have a material adverse effect on our
business, financial condition and results of operations.
OUR LENGTHY SALES AND IMPLEMENTATION CYCLE COULD CAUSE DELAYS IN REVENUE GROWTH.
The period between our initial contact with a potential customer and
the purchase of our products and services is often long and may have delays
associated with the lengthy budgeting and approval process of our customers.
Historically, our typical sales cycle has been approximately three to six
months and the implementation cycle at customer sites has been approximately
an additional six to twelve months. These lengthy cycles will have a negative
impact on the timing of our revenues, especially our realization of any
transaction fee based revenues.
We believe that a customer's decision to purchase our products and
services is discretionary, involves a significant commitment of resources,
and is influenced by customer budgetary cycles. To successfully sell our
products and services, we generally must educate our potential customers
regarding the use and benefit of our products and services, which can require
significant time and resources. Many of our potential customers are large
enterprises that generally take longer to make significant business
decisions. In addition, our solutions include enterprise applications that
take significant time to deploy successfully across an organization.
OUR FUTURE REVENUES DEPEND UPON OUR ABILITY TO INCREASE TRANSACTION VOLUME ON
MARKETSITE MARKETPLACES.
If the transaction volume on the MARKETSITE marketplaces does not
grow, it is unlikely that we will ever achieve or maintain profitability. We
currently derive substantially all of our revenues from licensing our
MARKETSITE and BUYSITE solution to buyers and providing related services.
Transaction revenue from MARKETSITE has been immaterial to date. However, our
business model calls for a significant portion of our revenues in the future
to be based upon a percentage of the transactions completed on MARKETSITE
marketplaces developed by current and future MARKETSITE PORTAL SOLUTION
licensees. Accordingly, our future revenues will depend significantly on the
number of transactions that are successfully completed on the MARKETSITE
marketplaces.
WE MAY NOT BE ABLE TO HIRE AND RETAIN SUFFICIENT SALES, MARKETING,
TECHNICAL AND SERVICES PERSONNEL THAT WE NEED TO SUCCEED BECAUSE THESE
PERSONNEL ARE LIMITED IN NUMBER AND IN HIGH DEMAND.
If we fail to hire and retain sufficient numbers of sales, marketing
and technical personnel, our business, operating results and financial
condition would be harmed. Competition for qualified sales, marketing,
technical and services personnel is intense as these personnel are in limited
supply, and we might not be able to hire and retain sufficient numbers of
such personnel to grow our business. We need to significantly increase our
technical and services staff to support the growth of our business and our
increasing commitments to our customers. We also need to substantially expand
our sales operations and marketing efforts, both domestically and
internationally, in order to increase market awareness and sales of our
BUYSITE and MARKETSITE PORTAL SOLUTION and the related services we offer. In
addition, our competitors have in the past attempted to hire our employees
away from us. We expect that they will continue to attempt to do so in the
future.
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WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND
FAILURE TO MANAGE OUR GROWTH COULD STRAIN OUR MANAGEMENT AND OTHER RESOURCES.
Our ability to successfully offer products and services and
implement our business plan in a rapidly evolving market requires an
effective planning and management process. Future expansion efforts could be
expensive and put a strain on our management and resources. We have
increased, and plan to continue to increase, the scope of our operations at a
rapid rate. Our headcount has grown and will continue to grow substantially.
At March 31, 2000, we had a total of 936 employees, and at March 31, 1999, we
had a total of 209 employees. In addition, we expect to hire a significant
number of new employees in the near future. To manage future growth
effectively, we must maintain and enhance our financial and accounting
systems and controls, integrate new personnel and manage expanded operations.
We can not assure you that we will be able to do this effectively.
OUR CUSTOMER BASE IS CONCENTRATED AND OUR SUCCESS DEPENDS IN PART ON OUR ABILITY
TO RETAIN EXISTING CUSTOMERS.
During the three months ended March 31, 2000, Endesa Marketplace,
S.A. accounted for 16% and Portugal Telecom accounted for 12% of our total
revenues. If one or more of our major customers were to substantially reduce
or stop their use of our products or services, our business, operating
results and financial condition would be harmed. We do not have long-term
contractual commitments from any of our current customers and our customers
may terminate their contracts with us with little or no advance notice and
without significant penalty to them. As a result, we cannot assure you that
any of our current customers will be customers in future periods. A customer
termination would not only result in lost revenue, but also the loss of
customer references that are necessary for securing future customers.
IF SUPPLIERS DO NOT PARTICIPATE IN THE MARKETSITE MARKETPLACES, OUR MARKETSITE
MARKETPLACE PRODUCTS WILL NOT GROW AND OUR REVENUES WILL SUFFER.
If an adequate number of suppliers do not participate in the
MARKETSITE marketplaces, our MARKETSITE marketplace products will not grow
and our revenues will suffer. MARKETSITE marketplaces will be attractive to
suppliers only if a significant number of buyers are willing to purchase
goods and services through the MARKETSITE marketplaces. Suppliers incur costs
making information relating to their goods and services available on these
trading communities and thus must realize additional revenues to justify
their continued participation in these trading communities. We cannot assure
you that the suppliers will remain in the MARKETSITE marketplaces or that a
sufficient number of new suppliers will join these communities to make the
MarketSite marketplaces successful.
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IF OUR ELECTRONIC COMMERCE PRODUCTS DO NOT CONTAIN THE FEATURES AND
FUNCTIONALITY OUR CUSTOMERS WANT, OUR CUSTOMERS WILL NOT BUY THEM.
Our success depends upon our ability to accurately determine the
features and functionality required by customers and to design and implement
business-to-business electronic commerce products that meet these
requirements in a timely and efficient manner. If we fail to accurately
determine customer feature and functionality requirements, enhance our
existing products and develop new products, our current and potential future
customers will not buy them. To date, our products have been based on our
internal efforts and on feedback from a limited number of customers and
potential customers. We cannot assure you that we have determined or will
successfully determine customer requirements or that the features and
functionality of our future products and services will adequately satisfy
current or future customer demands.
OUR FUTURE REVENUES DEPEND UPON CURRENT AND POTENTIAL CUSTOMERS INTEGRATING OUR
SOLUTIONS INTO THEIR BUSINESSES.
Our success depends upon the acceptance and successful integration
by customers and their suppliers of our BUYSITE and MARKETSITE PORTAL
SOLUTION products. Our current customers and potential customers and their
related suppliers often rely on third-party systems integrators such as
Andersen Consulting, CSC, PricewaterhouseCoopers and Cambridge Technology
Partners and others to develop, deploy and manage their Internet-based,
business-to-business electronic commerce platforms and solutions. If a large
number of systems integrators fail to adopt and support our solution, if any
of our customers or suppliers are not able to successfully integrate our
solution or if we are unable to adequately train our existing systems
integration partners, our business, operating results and financial condition
could suffer.
OUR STRATEGY OF ESTABLISHING STRATEGIC RESELLING RELATIONSHIPS WITH OUR PARTNERS
IS UNPROVEN AND MAY NOT BE SUCCESSFUL.
We have established strategic relationships with Andersen
Consulting, British Telecommunications, Singapore Telecommunications,
Banamex, Deutsche Telekom, NTT Communications, Toronto Dominion Bank, General
Motors, Citigroup, PricewaterhouseCoopers, Swisscom AG and Cable and Wireless
Optus, among others, each of whom is entitled to resell our existing BUYSITE
application to their customers. These relationships are new and this strategy
is unproven, and we cannot assure you that any of these resellers, or those
we may appoint in the future, will be able to resell our BUYSITE product to a
sufficient number of customers, or that those customers will purchase our
applications and more importantly, connect into MARKETSITE marketplaces. To
date, a few of our partners have not been successful in reselling our BuySite
products. If our current or future strategic partners are not able to
successfully resell our BUYSITE product, our business will suffer.
OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND THIS CHANGE MAY MAKE
OUR PRODUCTS AND SERVICES OBSOLETE OR CAUSE US TO INCUR SUBSTANTIAL COSTS TO
ADAPT TO THESE CHANGES.
If the market for our products and services fails to develop and
grow or we fail to gain acceptance in this market, such failure would harm our
business, operating results and financial condition. Our market is
characterized by rapidly changing technology, evolving industry standards and
frequent new product announcements. To be successful, we must adapt to our
rapidly changing market by continually improving the performance, features
and reliability of our products and services or else our products and
services may become obsolete. We also could incur substantial costs to modify
our products, services or infrastructure in order to adapt to these changes.
Our business, operating results and financial condition
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PAGE 17
could be harmed if we incur significant costs without adequate results, or
find ourselves unable to adapt rapidly to these changes.
DELAYS IN RELEASING ENHANCED VERSIONS OF OUR PRODUCTS COULD ADVERSELY AFFECT OUR
COMPETITIVE POSITION.
We will need to continue to introduce new versions of our products
to add new features, functionality and technology that customers desire. In
the past, we have experienced delays releasing new products. As a result, we
cannot assure you that we will be able to successfully complete the
development of currently planned or future products in a timely and efficient
manner. Due to the complexity of these products, internal quality assurance
testing and customer testing of pre-commercial releases may reveal product
performance issues or desirable feature enhancements that could lead us to
postpone the release of these new versions. In addition, the reallocation of
resources associated with any such postponement would likely cause delays in
the development and release of other future products or enhancements to our
currently available products.
SECURITY RISKS OF ELECTRONIC COMMERCE MAY DETER FUTURE USE OF OUR PRODUCTS AND
SERVICES.
A fundamental requirement to conduct Internet-based,
business-to-business electronic commerce is the secure transmission of
confidential information over public networks. Failure to prevent security
breaches of the MARKETSITE marketplaces, or well publicized security breaches
affecting the Internet in general, could significantly harm our business,
operating results and financial condition. We cannot be certain that advances
in computer capabilities, new discoveries in the field of cryptography, or
other developments will not result in a compromise or breach of the
algorithms we use to protect content and transactions on MARKETSITE
marketplaces or proprietary information in our databases. Anyone who is able
to circumvent our security measures could misappropriate proprietary,
confidential customer information or cause interruptions in our operations.
We may be required to incur significant costs to protect against security
breaches or to alleviate problems caused by breaches. Further, a
well-publicized compromise of security could deter people from using the
Internet to conduct transactions that involve transmitting confidential
information.
FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, and if Internet usage continues to grow rapidly, its
infrastructure may not be able to support these demands and its performance
and reliability may decline. If outages or delays on the Internet occur
frequently or increase in frequency, overall Internet usage including usage
of our products and services could grow more slowly or decline. Our ability
to increase the speed and scope of our services to customers is ultimately
limited by and depends upon the speed and reliability of both the Internet
and our customers' internal networks. Consequently, the emergence and growth
of the market for our services depends upon improvements being made to the
entire Internet as well as to our individual customers' networking
infrastructures to alleviate overloading and congestion. If these
improvements are not made, the ability of our customers to utilize our
solution will be hindered, and our business, operating results and financial
condition may suffer.
CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR OUR FUTURE GROWTH.
The market for Internet-based, business-to-business electronic
commerce products is relatively new and is evolving rapidly. Our future
revenues and any future profits depend upon the widespread acceptance and use
of the Internet as an effective medium of business-to-business commerce,
particularly as a medium to perform indirect goods procurement and
fulfillment functions. The failure of the Internet to continue to develop as
a commercial or business medium or of significant numbers of buyers and
suppliers of indirect goods to conduct business-to-business commerce on the
Internet would harm our business, operating results and financial condition.
The acceptance and use of the Internet for business-to-business commerce
could be limited by a number of factors, such as the growth and use of the
Internet
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PAGE 18
in general, the relative ease of conducting business on the Internet, the
efficiencies and improvements that conducting commerce on the Internet
provides, concerns about transaction security and taxation of transactions on
the Internet.
OUR REVENUES MAY DECREASE IF GROWTH IN THE USE OF THE INTERNET IN THE MARKETS WE
TARGET DOES NOT OCCUR AS PROJECTED.
The use of the Internet as a means to interconnect buyers and
sellers and to create online trading communities is integral to our business
model. Our business strategy is, in part, to create a global,
business-to-business electronic marketplace for buyers and sellers of
indirect goods. However, the use of the Internet as a means of transacting
business is relatively new and has not been accepted by all customers in the
markets we have targeted. If the rate of growth of the Internet use in our
targeted markets is less than expected, or if the Internet fails to produce a
feasible electronic commerce marketplace, our revenues will suffer. We cannot
assure you that the use of the Internet as a means of conducting business
will continue to grow at a rate similar to the historical rates, if at all.
IF WE RELEASE PRODUCTS CONTAINING DEFECTS, WE MAY NEED TO HALT FURTHER SHIPMENTS
UNTIL WE FIX THE DEFECTS, AND OUR BUSINESS AND REPUTATION WOULD BE HARMED.
Products as complex as ours often contain unknown and undetected
errors or performance problems. Many serious defects are frequently found
during the period immediately following introduction and initial shipment of
new products or enhancements to existing products. Although we attempt to
resolve all errors that we believe would be considered serious by our
customers before shipment to them, our products are not error-free. These
errors or performance problems could result in lost revenues or delays in
customer acceptance and would be detrimental to our business and reputation.
In the past, defects in our products have delayed their shipments after those
products have been commercially introduced. While these delays have not been
material to date, we cannot assure you that undetected errors or performance
problems in our existing or future products will not be discovered in the
future or that known errors considered minor by us will not be considered
serious by our customers.
IF OUR POTENTIAL CUSTOMERS ARE NOT WILLING TO SWITCH TO OR ADOPT OUR ELECTRONIC
COMMERCE SOLUTION, OUR GROWTH AND REVENUES WILL BE LIMITED.
The failure to generate a large customer base would harm our growth
and revenues. This failure could occur for several reasons. Some of our
business-to-business electronic commerce competitors charge their customers
large fees upon the execution of customer agreements. Businesses that have
made substantial up-front payments to our competitors for electronic commerce
solutions may be reluctant to replace their current solution and adopt our
solution. As a result, our efforts to create a larger customer base may be
more difficult than expected even if we are deemed to offer products and
services superior to those of our competitors. Further, because the
business-to-business electronic commerce market is new and underdeveloped,
potential customers in this market may be confused or uncertain about the
relative merits of each electronic commerce solution or which electronic
commerce solution to adopt, if any. Confusion and uncertainty in the
marketplace may inhibit customers from adopting our solution, which could
harm our business, operating results and financial condition.
IF OUR EXTENSIBLE MARK-UP LANGUAGE SOFTWARE TECHNOLOGY DOES NOT PROVE TO BE
EFFECTIVE, WE WILL NOT REMAIN COMPETITIVE.
In connection with our acquisition of VEO Systems in January 1999,
we acquired the rights to its extensible mark-up language software
technology. This technology is an information modeling language for data
exchange in electronic commerce applications. If we are unable to utilize
this technology effectively or if this technology is not compatible with our
other technology or technology we develop or acquire in the future, we will
not remain competitive in our industry. Although we have not yet experienced
any material problems with this technology in our product development
process, we have only limited experience utilizing this technology to date.
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OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our
executive officers and other key personnel, and none of our executive
officers (except Jay M. Tenenbaum) or key employees are bound by an
employment agreement for any specific term. If we lose the services of one or
more of our executive officers or key employees, or if one or more of them
decide to join a competitor or otherwise compete directly or indirectly with
us, our business, operating results and financial condition would be
seriously harmed. In particular, the services of Mark Hoffman, our Chief
Executive Officer, would be difficult to replace.
WE INTEND TO CONTINUE TO EXPAND OUR INTERNATIONAL OPERATIONS AND THESE EFFORTS
MAY NOT BE SUCCESSFUL IN GENERATING ADDITIONAL REVENUES.
We have generated significant international revenues and are
planning to increase our international operations and sales efforts. However,
we cannot assure you that international revenues will continue to increase or
that risks of international sales and operations will not harm us.
International business involves inherent risks, and we anticipate
the risks that may affect us include:
- unexpected changes in regulatory requirements and tariffs that may be
imposed on electronic commerce;
- difficulties in staffing and managing foreign operations;
- longer payment cycles and greater difficulty in accounts receivable
collection;
- potentially harmful tax consequences, including withholding tax
issues;
- fluctuating exchange rates;
- price controls or other restrictions on foreign currency; and
- difficulties in obtaining export and import licenses.
In addition, we have only limited experience in marketing, selling
and supporting our products and services in foreign countries. This may be
more difficult or take longer than we anticipate especially due to
international problems, such as language barriers or currency exchange
issues, and the fact that the Internet infrastructure in such foreign
countries may be less advanced than the Internet infrastructure in the United
States.
BECAUSE THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY IS LIMITED, OUR PROPRIETARY
TECHNOLOGY COULD BE USED BY OTHERS WITHOUT OUR CONSENT.
Our success depends, in part, upon our proprietary technology and
other intellectual property rights. To date, we have relied primarily on a
combination of copyright, patent, trade secret, and trademark laws, and
nondisclosure and other contractual restrictions on copying and distribution
to protect our proprietary technology. Although (i) we acquired three filed
patent applications as part of our acquisition of VEO Systems in January 1999
and (ii) we have filed and intend to file additional patent applications on
our other proprietary technology, we have no issued patents to date. We
cannot assure you that our means of protecting our intellectual property
rights in the United States or abroad will be adequate or that others,
including our competitors, will not use our proprietary technology without
our consent.
Furthermore, litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of resources and could harm our business, operating results and
financial condition.
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IF THIRD PARTIES CLAIM THAT WE INFRINGE UPON THEIR INTELLECTUAL PROPERTY, OUR
ABILITY TO USE CERTAIN TECHNOLOGIES AND PRODUCTS COULD BE LIMITED AND WE MAY
INCUR SIGNIFICANT COSTS TO RESOLVE THESE CLAIMS.
Litigation regarding intellectual property rights is common in the
Internet and software industries. We expect third-party infringement claims
involving Internet technologies and software products and services to
increase. If an infringement claim is filed against us, we may be prevented
from using certain technologies and may incur significant costs to resolve
the claim.
We have in the past received letters suggesting that we are
infringing the intellectual rights of others, and we may from time to time
encounter disputes over rights and obligations concerning intellectual
property. Although we believe that our intellectual property rights are
sufficient to allow us to market our existing products without incurring
liability to third parties, we cannot assure you that our products and
services do not infringe on the intellectual property rights of third parties.
In addition, we have agreed, and may agree in the future, to
indemnify certain of our customers against claims that our products infringe
upon the intellectual property rights of others. We could incur substantial
costs in defending ourselves and our customers against infringement claims.
In the event of a claim of infringement, we and our customers may be required
to obtain one or more licenses from third parties. We cannot assure you that
we or our customers could obtain necessary licenses from third parties at a
reasonable cost or at all.
OUR PRODUCTS DEPEND UPON THE CONTINUED AVAILABILITY OF LICENSED TECHNOLOGY
FROM THIRD PARTIES.
We license and will continue to license certain technology integral
to our products and services from third parties. Our inability to acquire any
third-party product licenses, or integrate the related third-party products
into our products, could result in delays in product development until
equivalent products can be identified, licensed and integrated. We also
expect to require new licenses in the future as our business grows and
technology evolves. We cannot assure you that these licenses will continue to
be available to us on commercially reasonable terms, if at all.
OUR MARKETSITE MARKETPLACES MAY NOT FUNCTION AS EFFECTIVELY WHEN HANDLING
HIGH VOLUMES OF TRANSACTIONS.
As the volume of transactions on our MarketSite marketplaces
increases, participants in these marketplaces may experience slower response
times or other problems. In addition, participants in our MarketSite
marketplaces will depend upon Internet service providers, telecommunications
companies and their computer networks to access these marketplaces. Each of
these has experienced performance problems in the past and could experience
similar problems in the future. Any delays in the response time of our
MarketSite marketplaces or other performance problems could adversely affect
customer usage and adoption of our solutions.
WE DO NOT HAVE A DISASTER RECOVERY PLAN OR BACK-UP SYSTEMS, AND A DISASTER
COULD SEVERELY DAMAGE OUR OPERATIONS.
We currently do not have a disaster recovery plan in effect and do
not have fully redundant systems for our service at an alternate site. A
disaster could severely harm our business because our service could be
interrupted for an indeterminate length of time. Our operations depend upon
our ability to maintain and protect our computer systems in our principal
facilities in Pleasanton, California, Santa Clara, California and Mountain
View, California, which exist on or near known earthquake fault zones. We
will depend on third parties to host most of our MarketSite marketplaces.
Although these systems are designed to be fault tolerant, they are vulnerable
to damage from fire, floods, earthquakes, power loss, telecommunications
failures and similar events.
OUR PUBLICATION OF INACCURATE CATALOG CONTENT DATA COULD CAUSE THE LOSS OF
CUSTOMERS AND EXPOSE US TO LEGAL LIABILITY.
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The accurate publication of supplier catalog content is critical to
our customers' businesses. Our MARKETSITE PORTAL SOLUTION contains content
management tools that help suppliers manage the collection and publication of
their catalog content. The failure of these tools to accurately publish
catalog content could deter businesses from participating in the MARKETSITE
marketplaces, damage our business reputation, harm our ability to win new
customers and potentially expose us to legal liability. In addition, from
time to time some of our customers may submit to us inaccurate pricing or
other catalog information. Even though such inaccuracies are not caused by
our work and are not within our control, similar consequences could occur. We
currently do not carry insurance that would adequately cover losses which may
be incurred as a result of inaccurate content publication.
ADDITIONAL GOVERNMENT REGULATIONS MAY INCREASE OUR COSTS OF DOING BUSINESS.
The laws governing Internet transactions remain largely unsettled.
The adoption or modification of laws or regulations relating to the Internet
could harm our business, operating results and financial condition by
increasing our costs and administrative burdens. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel, consumer protection and taxation apply to the
Internet.
Laws and regulations directly applicable to communications or
commerce over the Internet are becoming more prevalent. We must comply with
new regulations in both Europe and the United States, as well as any other
regulations adopted by other countries where we may do business. The growth
and development of the market for online commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad, as
well as new laws governing the taxation of Internet commerce. Compliance with
any newly adopted laws may prove difficult for us and may harm our business,
operating results and financial condition.
WE EXPECT OUR OPERATIONS TO CONTINUE TO PRODUCE A NEGATIVE CASH FLOW;
CONSEQUENTLY, IF WE CANNOT RAISE ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO
FUND OUR CONTINUED OPERATIONS.
Since our inception, cash used in our operations has substantially
exceeded cash received from our operations, and we expect this trend to
continue for at least the next two years. We currently anticipate that our
available cash resources will be sufficient to meet our anticipated working
capital and capital expenditure requirements for at least the next twelve
months. The estimate of the time period in which our cash resources will be
sufficient to meet our working capital and capital expenditure needs is a
forward-looking statement that involves risks and uncertainties. The actual
time period may differ materially from that indicated in the forward-looking
statement as a result of a number of factors so that we cannot assure you
that such resources will be sufficient for anticipated or unanticipated
working capital and capital expenditure requirements for this period. Factors
that may vary significantly affect whether our cash resources are sufficient
to meet our needs for the period indicated include our expectation that we
will continue to incur net losses and our continuing incurrence of
substantial negative cash flow. If adequate funds are not available or are
not available on acceptable terms, we may not be able to take advantage of
unanticipated opportunities, develop new products or services, fund our
continued operations, or otherwise respond to unanticipated competitive
pressures. We cannot assure you that any additional financing we may need
will be available on terms favorable to us, if at all.
INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS OUR STOCK PRICE.
The stock market and specifically the stock prices of Internet
related companies have been very volatile. This volatility is often not
related to the operating performance of the companies. This broad market
volatility and industry volatility may reduce the price of our common stock,
without regard to our operating performance. Due to this volatility, the
market price of our common stock could significantly decrease at any time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
MARKET RISK
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The following discusses our exposure to market risk related to
changes in interest rates, foreign currency exchange rates and equity prices.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Actual results could vary materially as a result of a
number of factors including those set forth in "Risk Factors" on page 13.
INTEREST RATE RISK
At March 31, 2000, we had cash, cash equivalents and short term
investments of approximately $97.0 million, compared to $7.8 million at March
31, 1999, which consist of cash and highly liquid investments. These
investments may be subject to interest rate risk and will decrease in value
if market interest rates decrease. A hypothetical increase or decrease in
market interest rates by 10 percent from the market interest rates at March
31, 2000 would cause the fair market value of our cash and cash equivalents
to change by an immaterial amount. Declines in interest rates over time will,
however, reduce our interest income.
FOREIGN CURRENCY EXCHANGE RATE RISK
Substantially all of our revenues recognized to date have been
denominated in U.S. dollars, a significant portion of which has been realized
outside of the United States. To the extent that we engage in international
sales denominated in U.S. dollars, an increase in the value of the U.S.
dollar relative to foreign currencies could make our products less
competitive in international markets. Although we will continue to monitor
our exposure to currency fluctuations, and, when appropriate, may use
financial hedging techniques in the future to minimize the effect of these
fluctuations, we cannot assure you that exchange rate fluctuations will not
harm our business in the future.
EQUITY PRICE RISK
We do not own any significant equity investments. Therefore, we
believe we are not currently exposed to any direct equity price risk.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 7, 2000, we completed the acquisition of Mergent Systems, Inc. and
issued 1,742,190 shares of our common stock to Mergent Systems, Inc's former
stockholders. The issuance was exempt from registration pursuant to
Regulation D under the Securities Act of 1933, as amended, because of the
limited number of Mergent Systems, Inc., stockholders, the sophistication or
accreditation of the stockholders and the manner in which the transaction was
conducted. In addition, we assumed 2,420,000 Mergent options to purchase
219,010 shares of our common stock (based on the exchange ratio).
On November 24, 1999, we completed the acquisition of CommerceBid.com, Inc.,
and issued 4,578,438 shares of our common stock to CommerceBid.com, Inc's
former stockholders. The issuance was exempt from registration pursuant to
Regulation D under the Securities Act of 1933, as amended, because of the
limited number of CommerceBid.com, Inc., stockholders, the sophistication or
accreditation of the stockholders and the manner in which the transaction was
conducted. In addition, we assumed 71,909,424 CommerceBid options to
purchase 4,714,242 shares of our common stock (based on the exchange ratio).
On March 17, 2000, we issued a warrant to Andersen Consulting LLP to purchase
up to 200,000 shares of our common stock at an exercise price of $110.92 per
share. These warrants vest and become exercisable only upon Andersen
Consulting LLP's achievement of certain performance milestones as described
in the applicable Statement of Work to the Joint Development Agreement with
Andersen Consulting LLP. These milestones will not be met until the second
quarter of 2000 at the earliest. If not exercised before March 17, 2005 the
warrants shall expire on March 17, 2005.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The following reports where filed on Form 8-K during the three months
ended March 31, 2000:
FORM FILING DATE EVENT REPORTED
- ---- ----------- --------------
8-K January 20, 2000 Agreement and Plan of Reorganization,
dated December 23, 1999, by and among
Commerce One, Inc., Gavel Acquisition
Corporation, Mergent Systems, Inc,
and other related parties.
8-K/A January 25, 2000 Amendment No. 1 to the Agreement and Plan
of Merger and Reorganization, dated as of
November 4, 1999, by and among Commerce
One, Inc., Eddie Acquisition Corporation,
CommerceBid.com, Inc., and other related
parties. Such amendment contains the
audited financial statements of CommerceBid.com,
Inc. for the period from March 1, 1999 through
October 31, 1999 and pro forma combined
financial information for Commerce One, Inc.
and CommerceBid.com, Inc.
8-K February 2, 2000 A report regarding the finalization of the details of
the strategic business relationship between General
Motors Corporation and Commerce One, Inc.,
relating to an internet-based trading exchange owned
by GM that enables buying and selling over the Internet
by GM, its dealers and its suppliers.
8-K/A March 22, 2000 Amendment No. 1 to the Agreement and Plan of
Reorganization dated December 23, 1999, by and
among Commerce One, Inc., Gavel Acquisition
Corporation, Mergent Systems, Inc. and other related
parties. Such amendment contained the audited
financial statements of Mergent Systems, Inc. for the
two years ended December 31, 1999 and pro forma
combined financial information for Commerce
One, Inc. and Mergent Systems, Inc.
8-K/A/A March 23, 2000 Amendment No. 2 to Agreement and Plan of
Reorganization dated December 23, 1999, by and
among Commerce One, Inc., Gavel Acquisition
Corporation, Mergent Systems, Inc. and other related
parties. Such amendment contained the audited
financial statements of Mergent Systems, Inc. for the
two years ended December 31, 1999 and pro forma
combined financial information for Commerce
One, Inc. and Mergent Systems, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COMMERCE ONE, INC.
Dated: May 15, 2000 /s/ Peter F. Pervere
---------------------------------
Peter F. Pervere
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
Dated: May 15, 2000 /s/ Mark B. Hoffman
---------------------------------
Mark B. Hoffman
Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)
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